China's crackdown on insider trading may slow pace of reform
Regulator stands accused of intimidating some firms into voluntarily suspending flotations
Concerns over insider trading in the mainland's initial public offering market have prompted regulators to tighten controls and Beijing may now be forced to scale back the pace of reform.
Traders say the authorities are concerned the market - which reopened to share sales last month after a 14-month hiatus - is being exploited by connected stakeholders ensuring generous cash-outs for insiders.
The China Securities Regulatory Commission has tightened up rules on pricing for offerings, and also stands accused of intimidating some firms into "voluntarily" suspending their listings, despite verbal commitments to stop meddling in the market.
"This is a total retreat in comparison to other areas of reform in China," said Ding Yuan, professor at the China Europe International Business School in Shanghai who also runs an equities mutual fund.
Ding said that instead of giving markets a "decisive role" as promised, January saw the "most heavily intervened IPO in the history of China". Drugmaker Jiangsu Aosaikang apparently delayed its IPO over concerns the listing was overpriced.
"People may have felt like the IPO wasn't politically correct, but it was totally legal. [Aosaikang] followed the regulations to the letter," Ding said.
Beijing has long struggled with the issue of price manipulation during listings. But some market-driven reforms may have exacerbated the problem.
"Look closely at companies that have gone public this year in China. They include ones from industries, or with [profit-loss ratios], that previously CSRC would not allow to IPO in China," said Peter Furhman, chairman of investment bank China First Capital in Shenzhen.
"To have a private sector company with downward-drifting net income successfully IPO in China was heretofore unthinkable. Hence, it is already far more of a market-driven system."
By allowing financially weaker companies to list, and at the same time making it easier for their owners and cornerstone investors to cash out on the primary market for the first time, the CSRC may have inadvertently encouraged overpricing.
That strategy was nipped in the bud by the new guidelines locking PE ratios within range of industry peers; some even priced themselves at discounts.
The price controls reduce the incentive for collusion to manufacture artificially high prices, and theoretically that benefits retail investors, too, as it means more potential upside to the shares once they begin trading.
The question remains how to encourage investors to invest in long-term growth instead of gambling on volatility.